Insurance can seem complicated at times. Essentially, business insurance is designed to protect your organisation from the financial cost of mistakes, natural disasters and accidents that affect your business and insurable assets.
Outlined below are common insurance-related expressions and concepts to assist you in making an informed decision about the insurance product that is right for you and your business.
Risk and insurance
There are a number of different insurances to cover the business needs of an organisation. The types of insurances and the level of cover vary and largely depend on the assets, turnover, employees and the type of business activities you operate. Insurance can be costly and quite complex but is an essential way your business can transfer the risk of loss (to the insurer) and reduce the likelihood of that loss impacting the daily operation of your business.
Insurance policies generally fall into three categories:
- Assets and Revenue – physical assets owned by you or your business
- Liability – legal liability for bodily injury and property damage caused to a third party by you, your business or your employees.
- People – a loss that arises from an accident (or injury) that occurs to your employees, board members/directors or volunteers.
Insurance Contracts Act
When you take out an insurance policy you are actually entering into a contract between an insurer and a customer. Most insurance policies are governed by the Insurance Contracts Act 1984 (“the Act”), which is an Act of Parliament that sets the rules of most insurance policies.
It sounds very formal but the good news is that this Act helps to protect your rights as a customer. The Act does, however, place a number of obligations on you as the customer to supply proper and correct information to an insurer, which helps them to accurately assess what you are trying to insure.
Duty of disclosure
Before you enter into a contract of general insurance with an insurer, you have a duty under the Act to disclose to the insurer every matter that you know, or could reasonably be expected to know, that is relevant to the insurer’s decision whether to accept the risk of the insurance and, if so, on what terms. The same duty arises on renewal, extension, reinstatement – or variation of the policy. The disclosure required is especially important in matters relating to the physical risk, past claims, cancellation of insurance covers, the imposition of increased premiums, insolvency or criminal convictions.
Disclosure is not limited to specific questions in a proposal or matters applying to the insured named in the policy but includes other relevant matters including past business or businesses or private insurances. If you breach the duty, even innocently, the insurer may be able to reduce its liability in respect of a claim or may cancel the contract. If the non-disclosure is fraudulent the insurer may also have the option of avoiding the policy from inception.
Product Disclosure Statement (PDS)
While it can seem daunting, it is very important that you take the time to review your PDS (also known as “insurers’ policy wording”) because it includes all the details of what your policy covers and what is does not. Your PDS is also a legal document.
The purpose of the PDS is to protect both you and the insurer so there are rights and obligations written into it that are important if you have to make a claim. Areas documented in a PDS include:
- what is covered under the policy;
- what is not covered (general exclusions) under the policy;
- general conditions of the policy;
- how to make a claim;
- cooling off period;
- policy Definitions; and
- information about the dispute resolution process.
Certificate of insurance/Policy renewal/Renewal schedule
These are all documents which are provided to you by your insurer, or your broker. These items confirm the insurance cover you have in place, the policy limits, any additions you have and what exclusions form part of your insurance policy.
These documents also outline important information about the insurance cover you have taken out which includes:
- your policy number;
- what you have insured, the level of cover and how much you are insured for;
- the period of insurance (inception date & expiry date);
- any excesses that apply to the insurance policy;
- the information you provided to the insurer that helped determine your insurance premium; and
- details of why it is important to disclose all relevant information that could affect your insurance policy and not just at the start of your policy, even if your situation changes.
These documents will be issued to you at each policy renewal. If the policy is ‘automatically renewed’ by your insurer or broker, it is also your responsibility to review these documents to make sure the policy coverage is still relevant to your business.
This is particularly important if there have been any changes to your business over the past 12 months or, if changes (that you are aware of) will occur in the future.
Keep in mind it is also your responsibility to notify your insurer or broker, of any material changes to your business which could alter the cover in place, at every renewal or to the best of your ability during the policy period.
The “sum insured” on your policy schedule or certificate of insurance, outlines the maximum amount your have selected and your insurer has agreed to pay if loss of damage occurs and you make a claim.
It is a critical part of the insurance process, to ensure you thoroughly review and calculate what the amount should be. For example, when calculating the assets to insure, there are a range of questions or calculators available from insurers or their websites to assist you.
Your sum insured amount relates directly to any payment the insurer will provide in the event of a claim. It is critical to review this amount every year. It is also important when reviewing these sums insured to factor changes such as increased costs for rebuilding, discontinued appliances or new model appliances (for example: computer systems), or even new items you have purchased over the past 12 months.
When insured assets are not accurately valued and a claim is need to be made, if, for example, an insured home is destroyed by a fire, the owner may find themselves in a position where they are unable to rebuild or to replace all of the items in the house. This is referred to as “underinsurance” because there is a difference in the sum insured amount and the total cost for rebuilding the home and replacement of contents/personal belongings.
However, if you over-insured and need to make a claim, the insurer will not pay you more than what it costs to repair or replace your items and will not refund you for purchasing more insurance than you needed to.
Some insurance policies will also highlight specific “limits” that may apply to your policy. These sub-limits are generally the maximum insurable amount payable for a specific item, risk or event in any one loss and in some cases, the total amount payable in the overall period of insurance. They are most commonly found in Home and Contents, Business Pack or Industrial Special Risks, Travel and Health Insurance policies. The limits include items such as personal effects (for example: jewellery, watches), artwork, money. For health insurance, they include an amount payable for a single visit and the maximum payable in a year. In travel insurance policies they refer to items such as lost luggage, medical treatments, cancellation of flights and legal liability.
In some instances the insurer will also offer to increase these sub-limits to ensure they meet with your business requirements. Upon acceptance by your insurer of an increase to the limits and (in most cases) additional premium being applicable, the cover can be altered accordingly.
“Exclusions” refer to circumstances and situations where cover it not provided. These are stated in the insurer’s PDS or Policy Wording so that you understand what cannot be insured under your insurance policy.
When you are comparing one policy with another, it is important to understand what isn’t included. The more exclusions within the policy, the more the cover reduces. This means the insurer is providing less cover and can sometimes be the reason why the insurance premium is also very different. Keep in mind: the fewer exclusions the broader the insurance policy and the more expensive it will be.
The “insurance premium” refers to the amount you pay to buy cover from the insurer. The premium is assessed by the insurer and calculated by a number of different factors:
- the type of business activities;
- previous claims history;
- your business risk management processes;
- size of your organisation;
- the business’ annual turnover;
- type of employees your business has (full time, part-time, labour hire, volunteers)
The premium amount will also show all applicable government taxes such as GST and stamp duty and/or Fire Service Levy where applicable.
The “policy excess” refers to the amount of money required to be paid to the insurer before any amount is paid by your insurer for a claim.
The excess amount can be applied to your policy in a few different ways:
- the insurer will have a “minimum required” excess amount they require you to pay when a claim occurs. (For example: Business Policy – glass replacement $250). This can be referred to as “basic excess” or “standard excess”;
- your business may elect to specify an amount you are willing to pay over and above the “minimum required” excess by insurer in the event of a claim. (For example: minimum excess is $500, your business elects to pay an excess of $2,000); or
- your insurer may also include “additional excesses” which would also apply in the event of a claim and be in addition to your basic excess. (For example: motor vehicle age excess for drivers under the age of 25.)
In some cases if you are prepared to pay a higher excess than the standard excess your policy premium may decrease because of you are taking on more of the insurance risk yourself.
As soon as you are aware of a circumstance that may cause a loss to your business, or a circumstance that could give rise to a claim (from a third party), you should notify your insurer or broker. Once your insurer has been notified of a loss to your business or third party, they can begin to help you. It can also assist in reducing the overall costs associated with your claim.
Insurers will want to work with you quickly and effectively to repair, replace or make any appropriate payments. Being helpful, providing factual and detailed information, answering any specific questions will also help speed up the process.
Sometimes external service providers retained by the insurer known as “loss adjusters” will need to assess the damage while in other instances you may simply be required to provide a copy of a receipt, credit card statement and/or photograph to establish what an item was and how much it cost.
In the event of a claim to your premises, you are able to make any necessary emergency repairs to your premises to reduce the risk of further damage. Such as, storm damage to your office roof – you can arrange for emergency repairs to stop water getting inside your property.
When very large scale losses such as bushfires and cyclones occur, insurers will send claims employees to the area to assist with processing your claim.
Understanding the above common insurance terms should help you make a more informed decision when you’re considering your insurance options.